 Hello, in this lecture we're going to talk about partnerships and we're going to talk about the selling of a partnership interest. We will be able to describe the process of selling a partnership interest, create the journal entry to record the sale of a partnership interest, define the effect of journal entry to sell a partnership interest on the trial balance accounts, and explain the effect on the capital counts of selling a partnership interest. So if we were to look at this in terms of a slightly different way we can look at what if B sells the capital interest to the partnership for cash. So now B is saying hey I'm going to take off I need to leave and I want to sell my partnership interest to the partnership. So now the other two partners M and B are going to basically buy out, I mean M and L are basically going to buy out B in this case. So that's going to be the arrangement of the agreement, B is going to sell the capital accounts to the partners for cash of 200,000. So is cash going to be affected? Yeah. So we're going to think about this, first I want to think about the types, the part of the journal entry that we can do. Then we'll run into a problem and then we'll do some calculations to adjust for that problem. So first we're going to say is cash affected and we're going to say yeah cash is going to go down because the partnership is paying B for B's interest. So the partnership is saying hey B we're going to give you 200,000 for your capital accounts interest. Therefore we're going to take cash down, cash is the balance we're going to do the opposite thing to it which is a credit by the amount paid and then we know that B needs to be off the books. B is on the books for 124.2, B is no longer with us. Therefore B should not have any amount in their capital accounts. Therefore that's a credit, we need to make it go down by doing the opposite thing to it which would be a debit of the 124.2. So now the partnership paid 200, B is going to be off the books at 124.2. We have a difference here. So we have a difference and that's going to be a debit. That debit is going to have to be divided in some way between M and L. Now you might be saying well once again well if B has a 124.2 interest in the partnership why is it that the partners would pay 200,000 to pay off the capital account balance? And again there could be multiple reasons. It could be that there's some kind of good will in the partnership that's not being reported in the books, some type of intangible assets. It could be that they really want to let B go and they're willing to pay more in order to do that. So there could be multiple reasons for that but once again that's an agreement between the partnership in this case and B. So those things will very rarely match. Now we need to figure out how to allocate that difference, how to allocate that plug. So we have our M, B, and L which is a 30, 20, 50 ratio that we discussed before between the 3, 2, 5, 30%, 20%, 50%. Here's the same capital account. So here's the capital accounts here. Here's the capital accounts represented in terms of the table. Book value of the company 540 that's equivalent to the assets cash list the liabilities representing the accounts payable in this case. And then the new income and loss ratio. So now we have to say, well B's gone, therefore we can't allocate between M and L between a 30, 50 because it needs to add up to 100 or 1 so we need to come up with a new ratio. So if we look at this, if we had a 3, 2, 5 ratio and now the 2 is gone we can think of it as a 3, 5 ratio. So if we think about our new ratio then we could think that we have a 3 out of a 3 plus 5 is 8 divided by 8. So our new ratio would be 0.375 or 37.5% for M. And then if we think about L, L have 5 over the 3 plus 5 or 8. So we can say that we have a 0.625 or a 62.5. So our new ratio that we're going to allocate this amount by, this difference by will be the 37.5 and the 62.5. So now we're going to allocate this difference. So that difference being the 200,000 cash received minus the capital accounts to take them off the books 124.2 and that's the 75.8 and we're going to allocate it times the 0.375 to M and that's going to give us the 28.425 and then we'll do the same thing over here. Of course the difference will be the other but we'll do the calculation just for the fun. 28 times the 0.625 that gives us the 47.375 and of course the 28.425 plus the 47.375 equals the 75.800. So we're going to allocate the plug the 75.800 in the in 28.425 and 47.375 M and L respectively if we look at the journal entry then it would look like this we're going to debit ends capital account 28.425 and debit L's capital account 47.375 and we'll see what the effect on the trial balance will be this time. All right so here's the same journal entry we have and this is our chart of accounts and of course here's that table that we are looking at let's see what would happen if we posted this transaction what would happen to the capital accounts does it do what we expected to do what do we expect it to do we expect the Indian capital accounts to be M 1227.75 B is going to be gone L is going to be at 272.17 225 to give us a total capital account or book value of 340. All right so B's capital account we're going to debit for the 124.2 so here's B has a credit we're doing the opposite thing to it debit in it making it go down to zero. Cash cash is going to go down so a cash has a debit balance we're doing the opposite thing to it crediting it cash in the partnership will go down to 350 and M has a credit balance in the capital account we're doing the opposite thing to it debiting the capital account making it go down to 1227.75 and L has a credit in the capital account like all capital accounts and it goes down with because we're doing the opposite thing to it which is a debit to 217.275. So note that the new capital accounts is still equal to book value of the company so the assets of 350,000 minus the liabilities of 10,000 still add up to the M and L's capital accounts at this time.